Abstract:&nbspThere is a great deal of geographic variation in Medicare
spending. For example, while the average Medicare cost per
beneficiary was around $5200 in 1996, Medicare spending, adjusted for
differences in regional prices and demographic composition, was about
$8000 per person in Miami, but only $3500 in Minneapolis. In this
paper, we explore the source of this variation. We find that a
substantial amount can be explained by differences across areas
in the health of the elderly population. This finding suggests
that some of the geographic variation in Medicare spending is
efficient. But even accounting for differences in the health of
the population, significant variation remains. We have been able
to explain some of the remaining variation. The strongest factors
are supply variables: for-profit hospitals and specialist physicians
both increase Medicare spending. If these factors are exogenous,
public policy may want to consider the supply of medical
services more than it currently does. We do not find that
expensive places spend a disproportionate amount on those near death.